There's a fellow I follow on Youtube who goes by the name @Economic Ninja who regularly uploads very informative financially related videos and recently, one of his videos caught my eye in which he talks about Credit Suisse's Zoltan Zohar, who had released a note to clients informing them of the very real possibility that Russia will start selling oil in exchange for gold sometime in 2023 as a response to the $60 price cap which came into effect last Monday and enforced by the G7, E.U. and Australia. Thanks to @EconomicNinja for his video, otherwise I might have missed it altogether.
Of course, Russia has replied by saying it would not accept the price cap, even if it meant cutting production. The country is the second largest producer of oil and reaped huge profits during the price surges we all experienced last summer at the pumps. Sanctions proved beneficial for Russia but not for those who imposed it.
Germany, the E.U.'s industrial powerhouse is reeling after getting cut off from its main source of natural gas (from Russia). They are now importing LNG from abroad at a much higher cost, fueling inflation which could then lead to riots and social imbalance.
Another country that has shot itself in the foot enforcing these sanctions on Russia is the U.S.A.. According to a New York Post article, America imported the equivalent of 672,000 barrels of crude oil and petroleum products per day from Russia in 2021, making up about 8% of all U.S. imports.
When Russia started their 'incursion' into Ukraine in February, Resident Biden moved to ban Russian oil imports. The result was a nasty supply crunch and the record high price of gasoline we saw this summer and to which we are still feeling the pain.
A post published by AmericanMilitaryNews claims that Joe Biden has overseen the biggest drop in the U.S. Strategic Petroleum Reserves since it began in 1977 and that supply is at the lowest in 38 years! At the start of the Ukraine War, The reserve stood at 588 million barrels and by September, had dropped to 434 million barrels. Biden's reasoning for releasing part of the strategic reserve was to help bring gas prices down and it did work but now the reserves have been depleted considerable. Three months have passed since September and we can assume the reserve numbers have dropped even more.
Also, let's not forget that one of the first things Joe Biden did in his very first day in office after he became President was to cancel the Keystone Pipeline which would have sent Canadian oil into the U.S.. His plan is to buy back oil at $100 per barrel. At present, WTI Crude is just under $80. If Biden sticks to his plan, this would imply a 20% increase in the cost of oil. This would then be reflected in higher prices at the pumps. Such a scenario is not good for getting votes. If oil goes even higher in the new year, as some experts have suggested, refilling the strategic reserves would cost even more.
This is where Zoltan Zohar comes into the picture. He suggests that Russia's President Putin will seize an opportunity the U.S.A. will not be able to resist. Since America now refuses Russian oil for dollars (which Russia doesn't want anyways), Putin will play the gold card and surprise the U.S. by offering a barrel of oil in exchange for one gram of gold as they get desperate to refill their reserves.
One gram of gold is worth just under $58 at time of writing, which is fairly close to the present price of WTI crude. Zohar predicts that the U.S. will also see this as an opportunity that can't be passed up and will make a startling counter-offer to buy 2 barrels of Russian oil for one gram of gold. If Russia were to accept such a deal, it would instantly reprice gold to double what it is now, to $3,600 an ounce. Zohar has said this could come as soon as next summer.
Of course, this would prove to be a bonanza for Russia as they have been aggressively storing gold in their vaults. By the 3rd quarter of this year, it is believed that Russia has 2,300 tons of gold. Selling oil for gold would only make them richer and more powerful.
At the same time, the U.S. would have to prove once and for all it has the gold it says it has, to the tune of 8,000+ tons. America's gold reserves have not been audited since Eisenhower was President in the 1950s. While former Secretary of The Treasury Steve Mnuchin did visit Fort Knox while under President Trump's watch, all he could muster was, "The gold is safe". There were no pictures or videos to prove this, adding to the mystery of whether the gold really exists.
Regardless, if this scenario comes to fruition, those holding gold in their possession stand to see enormous gains as a result. The dollar will probably take a hit since it would lose its status as the 'Petro-Dollar' and in my own opinion, will likely push gold prices even higher.
One country that stands to make significant gains if this plays out is my home country, Canada. Canada once had 1,000 tons of gold but was gradually sold off over the years to finance government deficits. Now Canada has zero gold in reserves. An article that appeared on Kitco News last May gives a good explanation as to why this was allowed to happen and pretty much had to do with the fact that we're next door to and under the umbrella of the U.S.A..
According to Nasdaq.com, Canada is the 4th largest oil producer in the world.
Hmmm, Canada has no stategic gold reserves. Hmmmm, sell cheap oil to America in exchange for gold. Gold doubles in price. Good news for Canada. If this oil for gold scenario does play out as Zohar suggests, then I expect Canada's gold reserves to be replenished in due time as a result if it starts selling its oil to the world in exchange for the yellow metal.
Not good news for net importers such as Japan which has 845 tons of gold in its reserves. How long would it take before its gold reserves are depleted?
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